Don’t balk on next tax hike: IMF

Doubling of levy to 10% in 2015 must go through, executive warns

ASTANA – Japan must not fail to complete the doubling of the consumption tax to 10 percent in October 2015 because its fiscal health is in a precarious state, a senior International Monetary Fund official said.

Prime Minister Shinzo Abe’s team should “carry out the tax hike as planned” to tell the markets that it is promoting fiscal rehabilitation, IMF Deputy Managing Director Naoyuki Shinohara said in an interview in Astana.

Shinohara visited the capital of Kazakhstan to attend an annual meeting of the Asian Development Bank.

There is concern that Tokyo might delay the second hike if the economy slows sharply in the wake of the 3-point tax hike to 8 percent taken on April 1.

“It would be very dangerous” if Abe’s government postpones the second tax hike, Shinohara said, expressing concern that a failure to ensure fiscal discipline will trigger the hazardous collapse of the Japanese sovereign debt market.

To ease the negative impact of the tax hike on the economy, Shinohara said Japan might compile a supplementary budget for this fiscal year, which ends in March 2015.

Shinohara said the Bank of Japan has no immediate need to take further action on monetary policy, because the central bank’s drastic easing steps have been working well so far.

“As inflation expectations have been increasing steadily, (the BOJ) does not have to implement additional monetary easing measures,” he said, brushing aside speculation it may act if price growth shows signs of plateauing due to stagnating domestic demand.

But Shinohara added it will be difficult for BOJ to achieve its 2 percent inflation target by next spring.

Japan’s fiscal health is the worst among the major industrialized economies. Its public debt is equivalent to more than 200 percent of gross domestic product and central government debt topped ¥1 quadrillion last year for the first time ever.

The second tax hike is again aimed at covering swelling social security costs for the nation’s rapidly graying population.

Surprising that a government-funded agency would recommend an increase in tax and not a cut in public spending, so that private spending might take up the slack. Arguably private spending might be weak in the current context; but that strikes me as reason for challenging the ‘utility’ of government spending; and distortion of the economy for political imperatives.